Hanesbrands: An Attractive Spinoff Play?

Hanesbrands (HBI) was spun off from Sara Lee Corp. (SLE) on September 6. The new company produces a variety of undergarments and related items including socks and underwear. Its brands include Hanes, Champion, Playtex, Bali, Just My Size, barely there, and Wonderbra, all relatively well-known and mid-priced.

If we look at Hanesbrands in terms of the desired criteria for a spinoff play, the best I could say is that it partly qualifies as a good spinoff candidate. Ideally what you are looking for is a number of conditions that depress the price but are based on short-term factors. Of course, this is always easier to analyze (and less useful) after the fact.

1) Sara Lee, its parent company, is in the dog-house. The company is currently trading at a level not seen since the early 90's. Some of this reputation may rub off on Hanesbrands. In spite of this, Hanes Brand has strong brand names and an independent management team. For what it's worth, Coach (COH), which was spun-off of Sara Lee in late 2000 has risen approximately 10 fold.

2) Independent management This one is a bit tougher and I can't provide too much insight. The current CEO was in charge of the division under Sara Lee as well, so he's not completely independent but you rarely see that in spinoffs. The main thing is that the really senior management (e.g. the CEO) from Sara Lee is staying with Sara Lee and those individuals who have moved to Hanes Brand are now working for a separate company.

3) Management Incentives Again, this information is not readily available. I do know that some of the senior management held shares in Sara Lee prior to the spinoff. However, given the nature of executive compensation today, it is very likely that senior management has or will receive options.

4) Company differences One of the theories behind spinoff selling is that institutions are not interested in the business line of the child company. While the clothing segment is certainly different from food products you may actually be seeing the opposite effect here. As a result of it's name brand products the new Hanesbrands could be drawing in new buyers who would have steered clear of the packaged foods and weaker brands of Sara Lee.

5) Index delisting While Hanesbrands is not a member of the S&P 500, it does belong to the S&P 400 Midcap index. As such, you are not likely to see the large scale disinterest with a non-indexed equity.

So what we have is a company that does not have sufficient differences or scale to warrant large-scale institutional selling. For new buyers, that doesn't present a good entry point.

The stock has actually been a benefit to Sara Lee shareholders (who purchased prior to the spinoff) as the combined value of SLE & HBI received in the spinoff is ~$17.75, while Sara Lee was trading for below $17 the day before the spinoff. Essentially, this financial engineering resulted in a short term gain of ~5% to SLE.

So while Hanesbrands did not receive the pummeling I would have liked, does it qualify as a buy on its own merits? Well at this point I would say no. The company does have a tremendous debt load of $2.6 billion against operating profits of $400 million. Their debt is junk-rated and hence they face relatively high interest payments. It is not that the company is a sell or even that it won't perform but there is not sufficient margin of safety at this point to bother buying. It is a low growth industry and without knowing more about managements strategy, there seems little reason for optimism.

I will leave you with Hanesbrands' management's opinion on the merits of the spinoff. Link available here.

"Hanesbrands is a large, strong and successful company that is going to get better by benefiting from greater focus as an independent public company," Noll said. "Hanesbrands has tremendous opportunity for growth and improvement through steady and strong cash flow, cost-saving initiatives and investment in powerful brands and product lines. We intend to build our largest and strongest brands, such as Hanes, Champion, Playtex, Bali and others, in core categories through continued innovation of key products."